Australia, N.Z. Dollars Tumble as Stocks Fall on Growth Concern

By Candice Zachariahs

Oct. 7 (Bloomberg) -- The Australian and New Zealand dollars plunged to the weakest in more than 5 1/2 years against the yen as the credit freeze intensified concern global growth is slowing, spurring investors to dump higher-yielding assets.

The U.S. dollar climbed to a four-year high against the Australian currency and the highest in two years against New Zealand's as the crunch fed demand for the greenback as a safe haven. The Australian dollar may extend its 25 percent slump in the past three months as the Reserve Bank of Australia is expected to reduce borrowing costs today.

``Risk aversion was the dominant theme,'' in currency markets, wrote David Watt, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets, in a research note today. ``Offering little hope for an Australian dollar bounce, the RBA is expected to cut rates by 50 basis points to 6.5 percent.''

The Australian dollar fell 4.1 percent to 73.63 yen at 7:56 a.m. in Sydney from 76.74 yen in late Asian trading yesterday. It earlier dropped to 70.32, the weakest since March 2003. The currency was 2.9 percent weaker at 72.28 U.S. cents, from 74.47 cents yesterday. It fell as low as 69.90, the lowest since September 2004.


New Zealand's currency slid 2.7 percent to 64.80 yen from 66.60 yen late in Asia yesterday. It touched 61.80 yen, the weakest since January 2003. The currency fell to 61.77 U.S. cents, the lowest since August 2006, before trading at 63.69 cents.

The currencies tumbled with stock markets around the world. The Standard & Poor's 500 Index retreated 3.9 percent, extending its worst weekly slump since 2001. Europe's Dow Jones Stoxx 600 Index dipped 7.6 percent, its steepest decline since 1987.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to a record 52.05 yesterday.

Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., luring investors to the South Pacific nations' assets. The risk in such trades is that exchange-rate fluctuations erase profits.

RBA Governor Glenn Stevens will lower the overnight cash rate target to 6.5 percent from 7 percent at 2:30 p.m. in Sydney today, according to 16 of 21 economists surveyed by Bloomberg News. Five forecast a quarter-point cut.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net